Why It’s Important to Have an HSA if You Retire Before 65

Medicare is the United States’ health insurance program for people age 65 or older (with some exceptions for those with permanent kidney failure and other disabilities). During your working years, you and your employer each pay a 1.45% Medicare tax on all earnings, and once you turn age 65, you can begin reaping the benefits by having the program help with medical expenses. Medicare won’t cover all medical expenses or most long-term care, but it will provide some financial assistance nonetheless.

There’s a chance, however, that someone retires before age 65 and at that time is no longer eligible for the health insurance plan offered by their previous employer — but neither are they eligible for Medicare yet, leaving them with a coverage gap. Or, they’re able to get insurance but can’t afford a plan comprehensive enough to cover their needs. Whatever the case, it’s important to have additional income sources to help cover healthcare costs.

Image source: Getty Images.

Get rewarded for saving for medical expenses

The older you get, the more likely it is you’ll have medical expenses. It’s an unfortunate but often unavoidable part of aging. It will, of course, vary by person, but the time between someone retiring early and being eligible for Medicare could bring on costly medical bills without good health insurance. That’s where a health savings account (HSA) can really come in handy.

An HSA is a tax-advantaged account to which you contribute pre-tax money to use for qualified medical expenses if you have a high-deductible health plan (HDHP). You can also contribute after-tax money to an HSA and claim a deduction when you file taxes. In either case, contributing to an HSA will lower your annual taxable income. For 2022, the contribution limits for an HSA are:

Coverage Type
Contribution Limit
Catch-up Contribution Limit for Those 55 and Older
Self-only
$3,650
$4,650
Family
$7,300
$8,300

Data source: IRS.

If you’re going to be spending money on medical expenses regardless, you might as well put the money aside and get the tax break and lower your tax bill simultaneously. This will save you money on the back end.

Using an HSA to supplement potential costs

Even though you must be enrolled in an HDHP to contribute to an HSA, any funds deposited can be used to pay for medical expenses even if you’re no longer enrolled. Since you can invest money in your HSA, it’s more than just a savings account. Although, if you’re nearing retirement and planning to use your HSA funds soon, be careful about leaving too much in stocks because you may find yourself on the unfortunate end of stock market volatility and have your HSA savings plunge.

However, if you’ve been making consistent contributions to your HSA throughout your career, you can likely accumulate a sizable amount that will help supplement the medical costs you run into between early retirement and Medicare eligibility and even thereafter.

Let’s imagine you contributed $300 monthly to a fund inside your HSA, averaging 8% yearly returns over 15 years. After 15 years, you would’ve accumulated over $97,700, even though you only personally contributed $54,000. If you’re enrolled in a family plan and contributed $600 monthly during that time with the same returns, you’d have accumulated close to $195,500 while only personally contributing $108,000.

Keep the future in mind

HSAs provide front-end and back-end benefits. Not only can you lower your taxable income by making contributions, but you can also invest those contributions, allowing them to grow and compound with the chance for tax-free withdrawals. If you’re eligible to contribute to an HSA, you should absolutely consider it. It may not come in handy today or tomorrow, but your future self will surely thank you — especially if you find yourself retiring early.

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